Our Economic Outlook for 2014: 2.6% GDP Growth

Four years after the recession ended, the convalescence appears to be endless. Though GDP has long since recovered and gained on its previous high — as have stock markets — employment, home prices and housing sales are still well below 2009 levels. Growth in most sectors remains subdued.

2014 is likely to be more of the same: at best, modest improvement in a subpar economy, with prolonged or repeated political crises increasing the odds of shaving billions from GDP. A reasonable bet would be that GDP will grow about 2.6% next year.

Consumers should feel a tad more secure, having weathered the payroll tax hike of last January, as well as the impact of the federal budget sequester in fiscal year 2013. With personal income rising at least 3.5% next year and wages climbing faster than inflation for the first time since the Great Recession hit, consumers are likely to spend slightly more freely. Look for a gain near 2.5% in total consumer spending next year.

A small bump in business investment is probable, too — 4.5% or so. It’ll be mostly directed at new equipment and technology in a ceaseless quest to increase productivity and reduce labor costs. With the notable exception of the shale energy industries, expect little expansion in production capacity to materialize. Many big firms will continue to use their available cash for stock buybacks instead.

Advertisement

Hiring will pick up a little more speed. Look for net job growth to increase from an average of only about 180,000 a month this year to roughly 200,000 a month in 2014. That’s nothing to crow about, but over the course of next year, it will help push joblessness to near 7%. Doubtless, though, there’ll be plenty of zigzagging on the way. Indeed, the unemployment rate is almost certain to increase before it drops back down, as more folks are encouraged to reenter the labor force, looking for work.

Figure on a bit of a boost from the housing sector. We expect existing-home sales to climb by about 4% next year while new-home sales jump a healthy 16%. That’s good news not only for construction firms, but also for landscaping, appliance, furniture and other related businesses. As for home prices, they’ll continue to rise in 2014, but at a more measured pace than this year.

Little change in total government spending — federal, state and local — is likely next year. A full year of budget cuts under the ongoing sequester will take a slightly larger toll on Uncle Sam’s spending in 2014 than in 2013. But as their tax revenues pick up, states and municipalities will shell out more for public projects (schools, water facilities, roads, etc.) plus some hiring.

Meanwhile, improving overseas economies spell more U.S. exports in 2014. With Europe coming out of recession and China’s economic slowdown leveling out, overseas sales should rise by about 5%. But imports will also head higher next year, wiping out any narrowing of the U.S. trade deficit or, more likely, widening it.